Supreme Court New South Wales

• Medium Neutral Citation: Patterson Building Group Pty Ltd v Holroyd City Council [2013] NSWSC 1484
• Hearing dates: 18 September 2013 and written submissions 23 September 2013
• Decision date: 24 September 2013
• Jurisdiction: Equity Division
• Before: White J

Decision

Refer to paras [81] and [82] of judgment.

• Catchwords: CONTRACT - permits the principal to call on a guarantee when it has an arguable claim to entitlement to moneys - recourse to security before final determination of the claim does not interfere with the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW) or a prior adjudicator's determination
• Legislation Cited: Building and Construction Industry Security of Payment Act 1999 (NSW)
• Cases Cited: Fletcher Construction Australia Limited v Varnsdorf Proprietary Limited [1998] 3 VR 812; Clough Engineering Limited v Oil and Natural Gas Corporation Limited [2008] FCAFC 136; (2008) 249 ALR 458; FMT Aircraft Gate Support Systems v Sydney Ports Corporation [2010] NSWSC 1108; Bide v Harrison [1873] LR 17 Eq 76; Martin v Hobson (1873) LR 8 Ch App 401; Minister for Commerce v Contrax Plumbing (NSW) Pty Ltd [2004] NSWSC 823; Minister for Commerce v Contrax Plumbing (NSW) Pty Ltd [2005] NSWCA 142; John Goss Projects Pty Ltd v Leighton Contractors Pty Ltd [2006] NSWSC 798; (2006) 66 NSWLR 707; John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 140; Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2005] NSWCA 248; Falgat Constructions Pty Ltd v Equity Australia Corporation Pty Ltd [2005] NSWCA 49; Wood Hall Limited v The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443; Redline Contracting Pty Limited v MCC Mining (Western Australia) Pty Limited (No 2) [2012] FCA 1
• Category: Interlocutory applications
• Parties: Patterson Building Group Pty Ltd (Plaintiff); Holroyd City Council (Defendant)
• Representation: Counsel: F Corsaro SC (Plaintiff); G Sirtes SC (Defendant); Solicitors: Holman Webb Lawyers (Plaintiff); HWL Ebsworth Lawyers (Defendant)
• File Number(s): 2013/265955

Judgment

1 HIS HONOUR: This is an application for an injunction to restrain the defendant until further order from calling on, or drawing down on, two guarantees issued by St George Bank limited in favour of the defendant, each in the sum of $232,091.70.

2 The plaintiff and the defendant entered into a contract for the construction by the plaintiff of community facilities at Pemulwuy, which I presume is in the defendant's local government area.

3 Clause 5 of the Conditions of Contract, relevantly, provide:

"5 Security

5.1 Provision

Security shall be provided in accordance with Item 13 or 14. All delivered security, other than cash or retention moneys, shall be transferred in escrow.

5.2 Recourse

Security shall be subject to recourse by a party who remains unpaid after the time for payment or where the Principal claims to be owed monies by the Contractor.

...

5.4 Reduction and release

Upon the issue of the certificate of practical completion a party's entitlement to security (other than in Item 13(e)) shall be reduced by the percentage or amount in Item 13(f) or 14(d) as applicable, and the reduction shall be released and returned within 14 days to the other party.

...

A party's entitlement otherwise to security shall cease 14 days after final certificate.

Upon a party's entitlement to security ceasing, that party shall release and return forthwith the security to the other party."

4 Item 13 had the heading "Contractors Security" and made provision for the item to be filled in against the headings of "Form", "Amount or maximum percentage value of this separable portion", and, "Contractors security upon the certificate of Practical Completion is reduced by (subclause 5.4)". Nothing was filled in against the heading, "Form". Because nothing was stated in relation to the other items, the amount or maximum percentage value of the separable portion was stated to be five per cent of value of that separable portion. Item 13(f) stated that the reduction of security upon issue of the Certificate of Practical Completion was 50 per cent of the amount held. Item 14 was also not filled in. Nonetheless, it is clear that the two bank guarantees were the security provided in accordance with clause 5.1.

5 Clause 35 of the Conditions of Contract provides:

"35 Defects Liability

The defects liability period stated in Item 27 shall commence on the date of practical completion at 4:00 pm.

The Contractor shall carry out rectification at times and in a manner causing as little inconvenience to the occupants or users of the Works as is reasonably possible.

As soon as possible after the date of practical completion, the Contractor shall rectify all defects existing at the date of practical completion.

During the defects liability period, the Superintendent may give the Contractor a direction to rectify a defect which:

a) shall identify the defect and the date for completion of its rectification; and

b) may state a date for commencement of the rectification and whether there shall be a separate defects liability period therefore (not exceeding that in Item 27, commencing at 4:00 pm on the date the rectification is completed and governed by this clause).

If the rectification is not commenced or completed by the stated dates, the Principal may have the rectification carried out by others but without prejudice to any other rights and remedies the Principal may have. The cost thereby incurred shall be certified by the Superintendent as moneys due and payable to the Principal."

6 On 5 June 2013, the superintendent issued a Certificate of Practical Completion in the following terms:

"1. On 12 October 2011 the parties entered into the Contract.

2. Clause 34.6 of the Contract provides for the issue of a Certificate of Practical Completion when the Contractor reaches Practical Completion.

3. The Contractor has advised that while it has substantially completed the WUC it is presently not in a position to meet all of the requirements for Practical Completion.

4. By further agreement dated 5 June, 2013 (Further Agreement), the Principal, notwithstanding that the Contractor has not been able to meet the requirements for Practical Completion, agreed, on particular terms to direct the Superintendent to issue a Certificate of Practical Completion. A copy of the Further Agreement is attached to this Certificate.

5. Subject to clause 34.6 of the Contract and the provisions of the Further Agreement, the Superintendent declares Practical Completion was achieved on 30 May 2013."

7 The "Further Agreement" attached to the certificate was in the form of a letter from the defendant, addressed to the managing director of the plaintiff, dated 4 June 2013, that was accepted by the plaintiff on 5 June 2013. It states:

"I refer to your letter of 24 May 2013 indicating that the Contractor is of the view that Practical Completion has been reached and requesting that the Superintendent issue a Certificate of Practical Completion. Council's letter in response dated 30 May 2013 has been amended as follows to take account of matters raised in your subsequent letter of 31 May, 2013 and the completion of the Thermoshield coating of the children's centre roof.

Council has considered your request and draws to your attention that at the present time at least the following parts of the definition of Practical Completion have not been satisfied:

(c) documents and other information required under the Contract which, in the Superintendent's opinion, are essential for the use, operation and maintenance of the Works have been supplied;

(d) the Contractor has supplied to the Principal warranties from all subcontractors engaged by the Contractor in the form of Annexure Part K.

Specifically, Council has assessed the following as being Outstanding Works:

1. Final compilation of operating and maintenance manuals and installers as built drawings for all subcontractors, suppliers and installers including but not limited to the following:

a. Electrical services

b. Hydraulic services

c. Mechanical services

d. Civil works

e. Solar array systems

f. Landscaping works

2. Provision of all annexure Part K warranties duly executed in accordance with the contract and or any remaining warranties executed by the Contractor.

3. Defects as directed by the superintendent and generally included in the defects lists for Architectural, Electrical, Mechanical, Hydraulic, Civil, Solar, Landscaping, Security and Fire Services.

Notwithstanding that Practical Completion has not been achieved, Council is prepared to direct the Superintendent to issue a Certificate of Practical Completion on the following terms:

...

5. The first paragraph of clause 5.4 is agreed to be deleted and in its place the following is inserted:

Upon the completion by the Contractor of the Outstanding Works (as that term is defined in Council's letter of 4 June 2013) a party's entitlement to security (other than in Item 13(e)) shall be reduced by the percentage or amount in Item 13(f) or 14(d) as applicable, and the reduction shall be released and returned within 14 days to the other party.

The balance of clause 5.4 is to remain.

...

... To the extent that Council is entitled to liquidated damages for delay on the part of the Contractor or to damages for any breach of contract associated with a failure by the Contractor to meet the requirements for Practical Completion, Council reserves its position.

To the extent that the Contractor is entitled to the Contract Sum, variations extensions of time, delay damages, and any other amounts that may be claimed under the Contract, the Contractor reserves its position.

For the avoidance of any doubt, the Contractor's accrued rights up until the date of Practical Completion, or under the Contract remain wholly unaffected, which includes the Prescribed Notice under clause 41 of the Contract and dated 14th May 2013."

8 The plaintiff contends that the Outstanding Works, as defined in the above letter, were completed on or about 19 June 2013.

9 The final relief initially sought in the summons was a declaration that the Outstanding Works, as defined in the agreement between the parties dated 4 June 2013 are complete and an order that the defendant release to the plaintiff both guarantees.

10 At the hearing, that claim for final relief was amended by deleting the claim for return of the second guarantee. The plaintiff contends that it is entitled to return of half the security pursuant to clause 5.4 of the contract as amended by the letter dated 4 June 2013, that is, it is entitled to the return of one of the guarantees.

11 Further amendments have been made to the summons after the hearing to encapsulate certain claims made in the course of submissions. The plaintiff says that either there were no "defects directed by the superintendent and generally included in the defects lists" for the various classes of work, or, if there were, then all such defects had been rectified. The plaintiff also says that all annexure Part K warranties duly executed in accordance with the contract have been provided. Both of these contentions are disputed.

12 The defendant employed consultants to report on the plaintiff's work prior to 4 June 2013. Reports of those consultants were served on the plaintiff. Those reports listed asserted defects in works done.

13 On 16 August 2013, the superintendent issued a notice under clause 35, setting out a list of defects he said required rectification. In the written outline of opening submissions, the plaintiff asserted that the latter document was the operative list of "defects directed by the superintendent", but said that all asserted defects had been rectified.

14 Mr Corsaro SC, who appeared for the plaintiff, submitted, as I understood it, that a list of defects, which post-dated the letter of 4 June 2013, could not satisfy paragraph 3 of the letter and that lists of defects contained in consultants' reports also did not come within paragraph 3 of the letter.

15 I do not think it is seriously arguable that paragraph 3 was devoid of content, as was implicit in counsel's submissions. It is clear from the letter that, as at that date, the defendant was contending that there were Outstanding Works that included defects in the work constructed to that date. Whether those defects were those listed in the consultants' letters forwarded to the plaintiff, as the defendant contends, or whether they were the defects specified in a later list sent by the superintendent on 16 August 2013, as contended for by the plaintiff in its written submissions, is not significant.

16 There is a real dispute as to whether all, or even a substantial part of the defects listed have been rectified. Moreover, the defendant contends that not all Part K warranties duly executed in accordance with the contract have been provided to it.

17 Annexure K which is Part K to the contract provides for the form of sub-contractor's warranty. The annexure refers to clause 52 of the General Conditions and that clause states that:

"The Contractor shall, on or before the date of practical completion of the WUC, provide to the Principal warranties from each of the subcontractors engaged in the WUC in the form of annexure Part J."

18 It appears from that clause and, indeed, others, for example, clause 9.2(e)(iii), that there may be a mistake in the references to the correct annexures. Be that as it may, it is clearly seriously arguable that, in terms of the letter of 4 June 2013, the Outstanding Works would not be complete until the plaintiff provided from all subcontractors warranties in the form of Part K of the annexures.

19 For the reasons in the affidavit of Mr Waterhouse, there is at least a serious question to be tried that the annexure K documents provided are not complete and that, in some cases, the warranties provided are not for the period specified in Part K.

20 In any event, even if the plaintiff were entitled to the return of one of the two bank guarantees, that in itself would not justify the interlocutory relief sought. The plaintiff seeks to restrain the defendant from calling on either of the guarantees and it acknowledges that the defendant is entitled to retain one of them.

21 On 15 July 2013, an adjudicator appointed pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) ("the Act"), made a determination in respect of a payment claim made by the plaintiff, dated 31 May 2013, for $499,802.61. The adjudicator determined that the $468,360, including GST, was payable. The adjudicated amount was paid.

22 In accordance with s 32 of the Act, that determination is not a determination of the parties' contractual rights and obligations. The adjudication determines, on an interim basis, an amount to be paid by the defendant to the plaintiff in respect of its claim for a progress payment, but, otherwise, and subject to s 34 of the Act, the adjudication does not affect the parties' rights under the contract.

23 On 16 August 2013, the plaintiff submitted a progress claim for a further $535,796.79. On the same day, the superintendent issued a progress certificate under clause 37.2 of the contract, asserting the superintendent's assessment of moneys due from the plaintiff to the defendant. In the progress certificate issued under clause 37.2, the superintendent stated that, under that clause, if the plaintiff did not make a progress claim in accordance with a particular provision, the superintendent could issue a progress certificate. The document stated that the superintendent had made an assessment that there were no moneys due to the plaintiff by the defendant. At the same time, the superintendent issued a notice asserting that moneys were due from the plaintiff to the defendant.

24 The notice stated that clause 37.2 provided that the superintendent could issue a certificate under the clause evidencing, amongst other things, the superintendent's assessment of moneys due from the contractor to the principal. The notice stated that the superintendent made an assessment under that clause that the plaintiff owed the defendant $138,143.82, excluding GST. The notice further stated that the superintendent had also formed the view that a further amount of $253,728.52 was also due from the plaintiff.

25 The sum of $138,143.82 comprised, in part, an amount of liquidated damages asserted to be owed by the plaintiff for a period from 12 April to 30 May 2013 and a further sum of $46,943.82, said to be owed in respect of what were called negative variations.

26 The document stated that the superintendent also considered that the plaintiff owed the defendant $253,728.52, but had not certified that amount at that point in time. This last figure was described as an amount of "adjudicated variations", less certain concessions.

27 In other words, the defendant claims to be owed moneys under these heads: partly in respect of liquidated damages, partly in respect of negative variations, and partly to recover amounts paid in respect of claimed variations on which the plaintiff succeeded before the adjudicator, but which the defendant contends are not properly payable.

28 The adjudicator also considered the claim for liquidated damages, but rejected it on the materials before him.

29 Also on 16 August, the superintendent provided a notice under clause 35, stating that he had determined that defects he set out in an annexure to the notice existed and requiring their rectification. The notice stated that if the asserted defects were not commenced, or completed by stated times, the defendant might have the rectification carried out by others and that the costs thereby incurred would be certified by the superintendent as moneys due and payable to the council. Some 51 alleged defects were listed. The superintendent provided an estimate of the cost of rectification in the amount of $153,458.

30 The plaintiff's case, as I understood it from its opening written submissions, was that there was a serious question to be tried that the plaintiff had completed all Outstanding Works and that the first guarantee should be released. In respect of the second guarantee, it said that the defendant's claims fell into two categories. One category was the claim for alleged defects. In respect of that, the plaintiff's initial position was that there was a real issue to be tried whether the alleged defects existed, or whether they had been rectified. In relation to the balance of the claims made by the defendant, the plaintiff's position was that there was a real issue to be tried in relation to those items, but the plaintiff submitted that, as those items had been the subject of an adjudication, whilst the adjudicator's determination stood, the defendant did not have an arguable claim to be entitled to call on the guarantee. That contention was elaborated on in counsel's oral submissions.

31 The defendant has not made a claim on either of the bank guarantees and it has not stated that it intends to make such a claim, either immediately, or at some particular time. It has been asked to give an undertaking that it will not call on the bank guarantees, but has refused to provide that undertaking.

32 The defendant has stated that it is presently of the view that it is entitled to the return of money that it has paid as part of the adjudication process under the Act, that it is entitled to the amounts that are the subject of negative variations and liquidated damages and damages for breach of contract. It states that, in its view, it is entitled to take steps in relation to the bank guarantees. But it stated on 29 August 2013 that it did not then presently intend to take steps to convert the bank guarantees to cash.

33 In response, the solicitors for the plaintiff wrote to the defendant's solicitors, thanking them for confirming that the defendant did not presently intend to take steps to convert the bank guarantees to cash within the foreseeable future. As the defendant's solicitor pointed out, the words, "within the foreseeable future", were not words that the defendant, or its solicitors had used. The defendant has gone no further than to say that it does not presently intend to take steps to convert the bank guarantees to cash.

34 As I understand the defendant's position, it is that it is not required to give notice prior to calling on the bank guarantees and it will not be drawn as to its intentions, except to say that, as at the date of the relevant correspondence, it did not have a present intention of calling on the bank guarantees.

35 As the defendant has not made a claim on the bank guarantees, the plaintiff has the onus of proving a negative, that is, the plaintiff has the onus of showing that there are no circumstances in which the defendant could have recourse to that security.

36 Only the front pages of each of the bank guarantees was in evidence. I understood it to be common ground that the so-called guarantees were unconditional undertakings by the St George Bank to pay the amount stated, or perhaps to pay an amount up to the amount stated, on demand being made by the defendant.

37 As between the defendant and the bank, the only question would be whether the defendant demanded payment. At least, so I assume. As between the defendant and the plaintiff, the defendant's right to demand payment depends on clause 5 of the contract, in particular, clauses 5.1 and 5.2, except insofar as the operation of those clauses might have been modified by the Act.

38 Clause 5.2 entitles the defendant to call on the security in two cases: namely, either where the defendant remains unpaid after the time for payment, or where it claims to be owed moneys by the plaintiff. The defendant relies on the second limb of the clause. Under the second limb of the clause the defendant does not have to demonstrate that it is in fact owed moneys. It is entitled to have recourse to the security if it claims to be owed moneys.

39 Contrary to the submissions of counsel for the plaintiff this clause does not merely provide security to the defendant for amounts that might be found to be due to it. The clause is a risk allocation device that addresses the issue of who is to be out of pocket while the dispute under the contract is determined (Fletcher Construction Australia Limited v Varnsdorf Proprietary Limited [1998] 3 VR 812 at 821, 826; Clough Engineering Limited v Oil and Natural Gas Corporation Limited [2008] FCAFC 136; (2008) 249 ALR 458 at [79]; FMT Aircraft Gate Support Systems v Sydney Ports Corporation [2010] NSWSC 1108 at [7]-[11]).

40 In such a case where the contract permits a call on a performance bond or guarantee where the principal has a claim to an entitlement to moneys, the principal may be restrained from having recourse to the security if the claim is made fraudulently, that is, if it knows that it does not have such an entitlement, or if it does not act in good faith, for example, if it capriciously selects the amount called on (Clough Engineering Limited v Oil and Natural Gas Corporation Limited at [59], 116), or if its exercise of its contractual right is unconscionable and in breach of ss 20 or 21 of the Australian Consumer Law.

41 Further, it has been held in FMT Aircraft Gate Support Systems v Sydney Ports Corporation that a principal may be so restrained if it is clear beyond serious argument that it has no such right to the amount claimed (at [13]-[15]).

42 The plaintiff did not contend that the defendant would be acting fraudulently, or in bad faith, or would engage in unconscionable conduct, if it had recourse to the security. It did, however, contend that it was not seriously arguable that the defendant was owed money, particularly having regard to the plaintiff's claim that it is owed a further sum of in excess of half a million dollars by the defendant.

43 The plaintiff read voluminous evidence as to why it was not in breach of the building contract in response to voluminous evidence adduced by the defendant as to why it was. As Pembroke J observed in FMT Aircraft and Gate Support Systems AB v Sydney Ports Corporation (at [17]), proceedings of the present nature involving a claim on a performance bond or guarantee should not involve a trial on the merits.

44 Most of the evidence in relation to the merits of each party's position in the building dispute was not referred to in the course of submissions. The evidence that was referred to showed that there was a genuine dispute as to whether the plaintiff had done what it was required to do, as to the quantum of the cost of rectifying defects, and as to the merits of the adjudicator's determination. There is also a genuine dispute in relation to the plaintiff's claim to be entitled to further moneys.

45 It is convenient to deal first with the defendant's claim that there are un-remedied defects. As I understood the submissions of Mr Corsaro for the plaintiff, at least at one point he contended that if there were a seriously arguable question that no moneys were owed in respect of the rectification of defects and if it were seriously arguable that no moneys might become owing, then the defendant could not establish that it was entitled to enforce the bank guarantee.

46 In this respect he referred to the observations of Pembroke J in FMT Aircraft and Gate Support Systems v Sydney Ports Corporation at [13]-[15] where his Honour said:

"[13] It is stating the obvious to say that a valid claim within the meaning of cl 5.2 must be non-fraudulent. In that sense, it must be a genuine claim. It adds nothing to say that it must be bona fide. On the other hand, despite occasional suggestions to the contrary, I am satisfied that a mere honest or bona fide 'belief' in a claim is insufficient: cf Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136 at [102]. The test could not be subjective honesty or bona fides. More is required. A claim that is irrational and misconceived could not justify recourse to the security simply because the claimant had an honest, but wrongheaded, belief in the correctness of its claim. Equally, it is inappropriate to insist that the claim be 'genuine and fair' as the plaintiff submitted. And it is certainly not necessary that the claim be reasonable. Both would impose requirements on the principal that could well be onerous and productive of disputes.

[14] What is required in my view is an arguable claim - one that is not specious, fanciful or untenable: Hughes Bros v Telede Pty Ltd (above) at 216 (Cole J). This is at least consistent with decisions that have held that an "entitlement" for the purpose of such a clause will have been established even though there is a genuine dispute or serious issue to be tried as to the existence of the right which underpins the entitlement: Fletcher Construction v Varnsdorf (above) at 821-3 (per Charles JA).

[15] For my part, I think that the test of what is a 'claim' for the purpose of a contractual provision such as cl 5.2 is relatively undemanding. An appropriate analogy is the criterion used for determining whether there should, or should not be, summary dismissal of a claim or proceeding: General Steel Industries v Cmr for Railways (1964) 112 CLR 125. Such an approach would, in my view, reflect the commercial purpose and the allocation of risk which I have explained."

47 Pembroke J was there dealing with a contract that permitted the principal to have recourse to security where the principal "has any claim or entitlement to payment of damages, costs or an amount or debt due by the Contractor to it under this contract".

48 Pembroke J's observations do not support the plaintiff's submission. To the contrary they are inconsistent with that submission. It is clear that his Honour was saying that, leaving aside fraud, bad faith or unconscionable conduct, the principal who has a contractual right to enforce security because he claims to be owed money, will only be restrained from doing so if it is clear that there is no seriously arguable basis for that claim.

49 I accept that it is seriously arguable that the plaintiff has not rectified all and indeed a substantial number of the long list of defects attached to the superintendent's letter of 16 August 2013. I accept that the defendant genuinely asserts in good faith that the cost of rectification of those works is as set out in the superintendent's notice.

50 That does not mean, however, that the plaintiff currently owes the defendant a debt for the amount of damages to which the defendant might be or become entitled by reason of the alleged breach of the building contract. Clause 5.2 is not as wide as the clause considered in FMT Aircraft Gate Support Systems v Sydney Ports Corporation. It makes no reference to the principal having a claim to payment of damages.

51 Nonetheless, I accept the defendant's argument that the reference in clause 5.2 to the defendant's claiming to be entitled to moneys owed by the plaintiff extends to a claim that the defendant is entitled to a particular sum for an alleged breach of contract.

52 There is authority in other areas of the law, depending on context, that a reference to moneys due, or to moneys due and owing can include a reference to an entitlement to unliquidated damages for breach of contract. (See in relation to the construction of wills, Bide v Harrison [1873] LR 17 Eq 76; and cf. Martin v Hobson (1873) LR 8 Ch App 401). I think in the context of the building contract the reference to the principal's claim to be owed moneys by the contractor extends to the principal's claiming to be entitled to a particular sum for damages for breach of contract.

53 In any event, under the last sub-paragraph of clause 35 if the principal incurs cost in having rectification work carried out by others the cost thereby incurred is to be certified by the superintendent and on such certification the cost incurred by the principal will become moneys due and payable to it. In other words the superintendent by issuing the requisite certificate can transmute the claim for damages to a claim for a debt owed.

54 The possibility of the superintendent's so proceeding means that it cannot be said that the defendant could not at some time in the future genuinely claim to be owed moneys by the plaintiff in respect of unrectified defects, even if the words "owed moneys" in clause 5.2 were given a narrower operation than I think they bear.

55 It follows that simply by reference to the claim in relation to the existence of unrectified defects it cannot be said that the defendant will not be entitled to have recourse to the security. It is therefore unnecessary for me to decide whether the defendant could also have recourse to the security to enforce a claim to be entitled to repayment of moneys it has paid pursuant to the adjudicator's determination, or to be paid amounts that have already been the subject of a decision by the adjudicator on which the defendant failed.

56 However, in case I am wrong in my first conclusion, I will deal with that question. The plaintiff did not submit that the adjudicator's determination was so clear that it was not seriously arguable that on a final determination of the parties' contractual entitlements different conclusions might be reached. Rather, the plaintiff contended that it would be inconsistent with the purpose of the Act if a principal could have recourse to security to satisfy on an interim basis its claim that it ought not to have been required to pay the contractor an amount an adjudicator has determined to be due. The purpose of the Act is to secure the contractor's cash flow by making provision for swift, albeit interim, determination of the contractor's entitlement to progress payments. If the principal could have recourse to security to recover an amount that it has paid pursuant to the adjudication then, so it was said, the Act's purpose would be thwarted. If that was the effect of clause 5.2 then, to use the expression of counsel, "The construction of clause 5.2 which ... allows the Defendant to restrict the operation of the Act is void under s34 of the Act."

57 The plaintiff submits that clause 5.2 should be construed so that the word "claim" in that clause is read as, "claim not subject to a determination under the Act". In support of that construction the plaintiff argued that a construction of the contract which results in the parties acting lawfully is to be preferred to a construction which results in a party or the parties acting unlawfully. By inference the plaintiff contends that the defendant would be acting unlawfully if it had recourse to the security to recover amounts which have already been the subject of an adjudicator's determination.

58 Sections 32 and 34 of the Act provide:

"32 Effect of Part on civil proceedings

(1) Subject to section 34, nothing in this Part affects any right that a party to a construction contract:

(a) may have under the contract, or

(b) may have under Part 2 in respect of the contract, or

(c) may have apart from this Act in respect of anything done or omitted to be done under the contract.

(2) Nothing done under or for the purposes of this Part affects any civil proceedings arising under a construction contract, whether under this Part or otherwise, except as provided by subsection (3).

(3) In any proceedings before a court or tribunal in relation to any matter arising under a construction contract, the court or tribunal:

(a) must allow for any amount paid to a party to the contract under or for the purposes of this Part in any order or award it makes in those proceedings, and

(b) may make such orders as it considers appropriate for the restitution of any amount so paid, and such other orders as it considers appropriate, having regard to its decision in those proceedings.

...

34 No contracting out

(1) The provisions of this Act have effect despite any provision to the contrary in any contract.

(2) A provision of any agreement (whether in writing or not):

(a) under which the operation of this Act is, or is purported to be, excluded, modified or restricted (or that has the effect of excluding, modifying or restricting the operation of this Act), or

(b) that may reasonably be construed as an attempt to deter a person from taking action under this Act, is void."

59 Section 32 is itself subject to s 34. The question is whether, if the defendant is entitled to have recourse to the security to recover amounts paid pursuant to the adjudicator's determination or in respect of claims that have been the subject of a determination, that would deprive the provisions of the Act of their effect, or would exclude, modify, restrict or have the effect of excluding, modifying, or restricting the operation of the Act, or could reasonably be construed as an attempt to deter a person, presumably the plaintiff, from taking action under the Act.

60 The plaintiff referred me to the decision of McDougall J in Minister for Commerce v Contrax Plumbing (NSW) Pty Ltd [2004] NSWSC 823 where his Honour found that provisions of a building contract that purportedly deferred for many months a contractor's statutory entitlement to progress payments was void. That question was not decided in the appeal from McDougall J's judgment (Minister for Commerce v Contrax Plumbing (NSW) Pty Ltd [2005] NSWCA 142). Hodgson JA (at [51]-[54]) and Bryson JA (at [58]) expressed different, but I think provisional, views on that question. Brownie AJA thought it better not to express an opinion on the point as it was unnecessary to do so.

61 In John Goss Projects Pty Ltd v Leighton Contractors Pty Ltd [2006] NSWSC 798; (2006) 66 NSWLR 707, McDougall J said (at [78]):

"[78] Bryson JA observed (at [58]) that '[t]he avoidance provisions should be applied according to their terms and no more widely'. The Act seeks to strike some balance between competing considerations. On the one hand, there is the protection of the entitlement of those who perform construction work, or supply related goods or services, to receive progress payments. On the other, there is the freedom of parties to contract as they wish. I respectfully agree with what Bryson JA said, although I would add that, in interpreting the 'avoidance provisions', it is necessary to pay due regard to the objects of and policy underlying the Act. But, that having been said, I do not think that anything in the Act generally, or in s 34 in particular, requires the Court to strain to find that a provision of a contract offends the Act."

62 The operation of s 34 was considered in John Holland Pty Ltd v Roads and Traffic Authority of New South Wales [2007] NSWCA 140 in the context of a principal's claim to retain security against its claim that it was entitled to a refund of moneys paid pursuant to an adjudication.

63 In that case the contractor provided security and in the course of the works determinations were made that adjudicated amounts well in excess of the amount of the security be paid by the principal to the contractor and the amounts were paid. The works reached practical completion and the contractor asked for return of half the security but that request was declined.

64 The Court of Appeal (upholding the decision of McDougall J) found that the principal was entitled to retain both its securities. It rejected the contractor's contention that the clause that would permit the retention of the moneys was void as that would be to "undo" the adjudicator's determination.

65 In Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2005] NSWCA 248 the Court of Appeal had held (at [217]-[219]) that a principal did not make a payment that precluded the contractor from suspending work pursuant to s 27 of the Act where the payment was made conditionally on its repayment being secured by a bank guarantee.

66 In John Holland Pty Ltd v Roads and Traffic Authority of NSW, Giles JA, with whom Tobias and McColl JJA agreed, said:

"[61] Brewarrina Shire Council v Beckhaus Civil Pty Ltd does not assist John Holland. Ipp JA was not concerned with voidness under s 34. The payment received by the contractor in that case was apparently sterilised because at the same time a like amount had to be committed to its bank; in the present case, the security was given long before the adjudicated amounts were paid, it was given in respect of performance of the contract in general, and John Holland's cash flow was enhanced by its receipt of the adjudicated amounts. The security was not, as was submitted, a 'clog' on its use of the adjudicated amounts.

[62] It is not correct that retention of security 'undoes' an adjudicator's determination, or that a superintendent who in performing his contractual function comes to a determination negates a statutory right to retain an adjudicated amount. The adjudicator's determination remains, and brings payment of the adjudicated amount, but that is interim and subject to a different position being established in relation to payment for the relevant work or related goods and services, contractually or in proceedings. If in civil proceedings it is decided that the contractor was entitled to $10 or $30, rather than the $20 determined by the adjudicator, that does not undo the adjudicator's determination. It has done its work in ensuring 'prompt interim progress payment on account, pending final determination of all disputes' (per Ipp JA in Brewarrina Shire Council v Beckhaus Civil Pty Ltd at [219], above). So also if, in the manner earlier described, the contractual mechanisms result in a contractual obligation on the principal to pay the contractor or the contractor to pay the principal. The contractor's right under the Act is to receive the adjudicated amount, but subject to final determination, and if the final determination involves the superintendent determining that the contractor was entitled to $10 or $30, rather than the $20 determined by the adjudicator, the superintendent is not negating the contractor's statutory right.

[63] Section 34 of the Act requires that the contractual provision exclude, modify or restrict, or have the effect of excluding, modifying or restricting, 'the operation of this Act'. The Act operated to require that the RTA pay the adjudicated amounts to John Holland, and it did so. (In relation to the Detonator Dump monies, it may be taken that it has done so or will do so if the challenge to the adjudicator's determination has failed or fails). There is no effect contrary to that operation of the Act if, in the final determination of the position between the parties, one party has to pay money to the other because the final arbiter takes a different view from that of the adjudicator. Section 32 of the Act preserves the final determination, by the contractual mechanism or by proceedings. Nor is there an effect contrary to that operation of the Act if security provided under the contract is retained, the contract on its proper construction and operation so permitting, to satisfy John Holland's obligation to pay money to the RTA if that is the outcome of the final determination."

67 John Holland is different from the present case because it concerned the principal's right to retain security against the possibility that on the final determination of the parties' contractual rights it was found that moneys that had been paid pursuant to the adjudicator's determination would be repayable. Mr Corsaro for the plaintiff rightly submitted that the present case is different. The present question is whether the principal can have recourse to the security before a final determination of the parties' contractual entitlements and notwithstanding an interim determination by the adjudicator in the plaintiff's favour.

68 Whilst I acknowledge that difference the question remains how is it that recourse to the security would exclude, modify or restrict the operation of the Act? The adjudicator's determination remains and it has brought payment by the defendant of the adjudicated amount.

69 The defendant says that the contractor's right to receive the adjudicated amount under the Act remains and is unaffected but it is subject to the defendant's contractual entitlements including its entitlement under clause 5.2. The defendant contends that just as a contractor can pursue parallel rights arising under the contract and under the Act (Falgat Constructions Pty Ltd v Equity Australia Corporation Pty Ltd [2005] NSWCA 49), so can the principal.

70 The Act has operated by the adjudicator's determination resulting in the defendant being required to make payment to the plaintiff that otherwise it could not have been compelled to make prior to the final determination of the parties' contractual rights.

71 If the plaintiff had provided cash security then I think it would be clear that the defendant's recourse to the cash security would not have affected the plaintiff's right unless the plaintiff was required to replenish that security. In the latter case then there would clearly be a modification or restriction of the operation of the Act. But that is not this case.

72 If the defendant calls on the bank guarantees then the evidence indicates that it would be required to put its bank in funds. In substance it would be in the same position as if it had provided security in the form of cash. The defendant's security would have been reduced but the plaintiff would still have secured the benefit of the adjudication determination under the Act. If on the final determination of the parties' contractual rights the plaintiff succeeds it would be entitled to have the security restored to it.

73 The position can also be tested by considering what the position would have been if, for example, the defendant had recourse to the security to meet its claim to be owed money on account of liquidated damages before there was a reference to adjudication. There would be nothing I think in the Act that could preclude the defendant from having recourse to the security in those circumstances and it does not appear to me that the plaintiff could undo the effect of the defendant's having recourse to the security by recourse to the procedures in the Act.

74 The Act provides a procedure by the making of payment claims for the recovery of progress payments (ss 8 and 13). A claim that the principal was required to reinstate security would not be a claim that the contractor was entitled to a progress payment.

75 Whilst the significant difference between the circumstances of the present case and those which obtained in John Holland Pty Ltd v Roads and Traffic Authority of NSW must be acknowledged, nonetheless, I think the reasoning in that case applies also to the present. I think it would be straining the operation of s 34 to find that it rendered void or required the reading down of clause 5.2.

76 In the circumstances it is unnecessary to decide the validity of the defendant's contention that if clause 5.2 were rendered void by the operation of s 34 there would then be no implied contractual restraint on the defendant's having recourse to the guarantees in accordance with their terms. The plaintiff relied upon the last sentence of clause 5.1. The effect of that sentence is obscure and I think it preferable to express no view on that question.

77 The remaining question concerns the balance of convenience. The plaintiff contended that if recourse were had to the bank guarantees, it would be severely prejudiced. That prejudice fell within a number of heads. First, the bank guarantees were secured by cash deposits and the bank would have recourse to those deposits. This, it was said, would reduce the plaintiff's retained earnings and working capital and put the plaintiff under financial strain. Secondly, it was said there was a risk that the St George Bank might consider that such an event might have a material adverse effect on its ability to observe its obligations under a guarantee facility, and this might result in the bank's demanding payment of moneys under the other facility. Moreover, it was said that the calling on the guarantee would adversely affect the plaintiff's reputation and could affect its ability to obtain other work, and it would affect the construction of another project owned by a related company where it is proposed that the plaintiff be the relevant constructor.

78 The relevance of the balance of convenience to the present issue is problematic. Unless there is a serious question to be tried that the plaintiff is entitled to final injunctive relief against the enforcement of the guarantees, the question of balance of convenience does not arise. The summons has been amended to include a claim for precluding the defendant from calling on the second guarantee until the final determination of the contractual claims. It is only because of that claim for final injunctive relief that the present claim for injunctive relief can properly be characterised as interlocutory. Nonetheless the amendment has been made, albeit after the conclusion of argument. But for the reasons I have given, I do not think there is a serious question to be tried that the defendant is not entitled to have recourse to the security.

79 The plaintiff agreed to supply the bank guarantees on conditions that they could be called on, not only where the defendant had established that the plaintiff owed it moneys but where it claimed to be owed money. It would substantially weaken the purpose for which such instruments are provided if a principal were to be restrained from calling on the guarantee or performance bond on the ground that to do so would cause hardship to the contractor or damage its reputation. The risk of hardship and the risk of damage to reputation were risks assumed by the plaintiff when it agreed to provide security on terms that recourse could be had to it merely on the defendant's claiming to be owed money (Wood Hall Limited v The Pipeline Authority [1979] HCA 21; (1979) 141 CLR 443 at 451, 457 and 461; Clough Engineering Limited v Oil and Natural Gas Corporation Limited at [109] and [135]; and Redline Contracting Pty Limited v MCC Mining (Western Australia) Pty Limited (No 2) [2012] FCA 1 at 66).

80 For these reasons I consider that the plaintiff's claim in paragraph 1 of the amended summons should be dismissed and that the defendant should be discharged from the undertaking it has given.

81 I make the following orders:

1. Order that paragraph 1 of the amended summons be dismissed.

2. Order that the defendant be discharged to the extent necessary from the undertaking given by it on 5 September 2013 and extended on 18 September 2013.

[Parties addressed on costs.]

82 In my view, costs should follow the event.

3. Order that the plaintiff pay the defendant's costs of the application for interlocutory relief.

4. Stand the matter over to 11 October 2013 before the Technology and Construction List judge.

Decision last updated: 10 October 2013